Dallas Federal Reserve takes temperature of oil and gas industry

Analysts are keeping a close eye on Russia and the potential impact recent events there will have on prices in the U.S.

By Kristen Cabrera and Amanda Kari McHughJune 26, 2023 2:01 pm,

The Dallas Federal Reserve Bank doesn’t just keep an eye on interest rates. It also checks in with the oil and gas industry.

Matt Smith, lead oil analyst for the Americas at Kpler, joined the Standard and said the Dallas Fed’s quarterly survey of the industry compares not just their yearly activity, but the previous quarter as well. Listen to the interview above or read the transcript below.

This transcript has been edited lightly for clarity:

Texas Standard: So what did the respondents expect the price of oil and gas to be at the end of the year? 

Matt Smith: Well, the average response was $77 they’re expecting for the end of the year. But you do have to bear in mind that currently we’re around just under $70 and the survey is also of oil and gas firms, so you would expect them to be having this more optimistic view.

That said, their view last quarter was that it would be a little bit higher at $79.50. So a little bit more pessimism there.

In terms of the natural gas side of things, expectations are that we’ll see it just under $3 in MMBtu . And so that’s just kind of showing where we are now. But again, that’s down from their view from last month. So a little bit of pessimism in the oil and gas patch here. 

Two other themes of this report seem to be costs and tighter credit conditions. What’s the takeaway on these items?

So in terms of costs across all firms, 60% expect drilling and completion costs to end the year higher than they were at the end of last year, although there is this distinct split between smaller and larger firms. So given economies of scale, nearly a half of these larger firms expect costs to be lower, or nearly 70% of the smaller firms expect things to be skewed higher.

In terms of tighter credit conditions, just over half of respondents have said that tighter credit conditions since February have had no effect. But again, this is tilted towards smaller companies seeing more of a significant impact. 

The reason the tighter credit conditions are not having as big an impact is because of something we’ve discussed before in that companies have focused in recent years on fixing their balance sheets and less on sort of “drill, baby, drill.” So these companies are in better financial shape and less reliant on credit. And so hence, the nearly 80% that expect tighter credit conditions through the rest of the year won’t really affect their business or will only have a slight impact there.

Well, there’s a comments section of this survey where Exploration and Production (E&P) firms can provide additional color. Anything to glean from that?

Yeah, there were some good ones, actually.

So there was one kind of recurring theme, and that was “anti-oil sentiment in the current administration will only raise the long-term price of oil.” And so that was one that came up a few times. Another one: “we’re not certain of what to expect. The highs were too high, the lows too low.” So, again, just speaking to that boom and bust nature of the oil industry and yet we’re seeing it once again here.

And then the final one, I thought this is pretty funny. It says, “It just feels like everyone is waiting on this recession to come, like Jennifer Love Hewitt screaming, ‘what are you waiting for?’ in the movie, ‘I Know What You Did Last Summer.’”

Oh, my goodness.

And it does kind of feel like that. So, yeah. So some interesting feedback there at the end. 

That is so interesting. Well, finally, this survey, I assume, was taken and distributed before events over the weekend in Russia with the oil and gas industry. Is that something they’re watching pretty closely or are things as normal right now? 

Oh, absolutely. They’re watching it because global events have such an impact on local oil prices. And so we’re kind of in the calm after the storm here. You know, the price response has been fairly muted. But the bigger picture is that Russia is only causing greater uncertainties to the market here, which could bring in a geopolitical premium to prices and further volatility with perhaps further instability in Russia. So definitely something to keep an eye on.

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